Debt Management vs Debt Settlement: Which Is Better

Posted on May 6, 2024 by Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee

Many Canadians struggle with debt and are looking for options. You might have wondered if debt management or debt settlement might be the right solution for you. To many people, debt management and debt settlement are the same, but while they sound similar, they are not.

This blog will examine the differences between debt management vs debt settlement and their pros and cons so you can make an informed decision on your debt relief solutions.

What is Debt Management?

Debt management, or credit counselling, begins with a financial assessment by a non-profit credit counsellor, who will examine your debt, income, and expenses to determine if you can repay your debts in full. Unlike in bankruptcy, you don’t have to be insolvent to qualify for a debt management plan (DMP), but you must be able to pay back your debts in full within five years.

A DMP consolidates unsecured debt into one monthly payment, including credit card debts, unsecured loans and past-due utility bills, paid to the credit counselling agency. Once you sign the paperwork for the DMP, the credit counsellor will contact all creditors you have included in your plan to inform them of the DMP. 

However, each creditor can independently decide if they agree to participate in the plan. They are not obligated to participate or freeze or lower your interest charges.

Another significant difference is that a DMP does not provide a stay of proceedings. You must continue making debt payments to any creditor who does not agree to the plan. Any outstanding debt can still be sent to collections, or legal action can be taken. A debt management plan also does not automatically stop wage garnishments unless the creditor agrees explicitly.

Why Choose a Debt Management Plan?

  • You have more debt than you can handle through debt consolidation.
  • Your credit score doesn’t make you eligible for a balance transfer credit card or personal loan.
  • You want to eliminate the risk of adding to your credit card balances.

 debt management vs debt settlement

What is Debt Settlement?

Debt settlement involves settling with your creditor at an amount smaller than full payment. Generally, there are three ways to achieve debt settlement:

  1. Directly negotiate with your creditor or debt collection agency
  2. Enroll in a debt settlement program with a for-profit company
  3. Work with a Licensed Insolvency Trustee for a consumer proposal or bankruptcy

Generally, the third option is the most widely accepted solution with the highest probability of success.

Negotiate With Creditors or Collection Agencies Directly 

You can opt to negotiate directly with a creditor or third-party collector, which generally will occur once your account has been written off and sold to a debt collection agency. Sometimes, the collector will approach you with a settlement offer, which you can counteroffer to lower the amount you have to pay even more.

Alternatively, you can initiate a settlement offer by offering your creditor or collector a percentage of what you owe. They will have the right to decline or counteroffer as well.

However, this approach only works if you have one or two problematic accounts you need to resolve. You may have temporary financial problems and manage to keep most of your accounts current. This could be an option to fix these two accounts and get back on track.

However, trying to settle your debt directly is risky, as it means your credit score is already impacted by falling behind so far that your account has been sold to a collection agency. Also, your creditor or collector does not have to agree to the terms. If you want to proceed with this option, ensure that all communication is done by mail to create a signed paper trail, so the settlement offer and acceptance are in writing, with the amount and terms of settlement to protect yourself. 

Enroll With a Private, For-Profit Agency for a Debt Settlement Program

The second option is signing up with a private company to set up a debt settlement program. This company will create an account for you to make payments into with any available funds to build the required amount for settlement offers.

Once this is done, the company will contact your creditors to begin negotiating settlements to reduce repayment to the lowest possible amount. Once they reach settlements, the money in the account will be used to pay your creditors. This process continues until all debts are settled.

While this sounds positive on the surface, it comes with several risks you must be aware of before deciding.

No guaranteed success: Where with a consumer proposal, the agreement is legally binding, meaning that once most of your creditors have accepted the proposal, it will be a binding agreement they all must honour.

On the other hand, when pursuing debt settlement through a company, there is no binding contract, as the settlement negotiations will only begin once funds are available. Your creditors are not obligated to agree to any settlement offers; the attempt could cause more problems.

Pay fees even if there are no results: You will have to pay the company’s high fees, even if they only get you partial or no results at all. You are in this situation because you have had problems making due payments, so losing more money through this process can worsen things.

Risk of Legal Action from Creditors: Creditors are not aware of the debt settlement program, as opposed to a consumer proposal, where all of your creditors are notified right at the beginning. While waiting for the necessary funds to accrue in the account, creditors could take legal action against you and get judgments for wage garnishment or property liens. Especially if a creditor gets a wage garnishment installed, they are even less likely to agree to a settlement as they can recoup the total amount via the garnishment.

 debt management vs debt settlement

Consumer Proposal and Bankruptcy

Consumer Proposals

A consumer proposal is a formal, legally binding process that a Licensed Insolvency Trustee administers. The trustee works with you to develop a proposal, an offer to pay creditors a percentage of what is owed, extend the time you have to pay off the debts, or a combination of both. This process allows a maximum term of five years to pay off debts.

The significant advantage here is that it helps you settle debts without filing for bankruptcy. This means that while it does impact your credit score, it’s not as severe as bankruptcy. Your assets are also protected as opposed to bankruptcy.

However, it is critical to note that you can only include unsecured debt in a consumer proposal. Any secured debt, such as a car loan or mortgage, cannot be included.


Sometimes, the financial hole might be too deep, and bankruptcy could be the most viable solution. Declaring bankruptcy can provide a fresh start, free from insurmountable debts. However, getting advice from a Licensed Insolvency Trustee (LIT) is critical before making a decision, as bankruptcy has far-reaching consequences.

Bankruptcy typically allows for debts to be discharged in as little as nine months if it is your first bankruptcy, making it the fastest way to eliminate debt. However, bankruptcy comes with some significant drawbacks. You will lose non-exempt assets, and the impact on your credit score will be more severe and long-lasting than with a consumer proposal.

Like a consumer proposal, secured debts, such as a mortgage or car loan backed by an asset, cannot be included in bankruptcy. These debts will remain separate.

Explore Our Debt Relief Options

Getting a clear, unbiased perspective on your situation is crucial when drowning in debt. This is where the services of a Licensed Insolvency Trustee come in. They can provide expert insights and tailor advice to your specific situation. Remember, exploring all your options and understanding each one’s consequences before deciding is essential. If you need more information or guidance, please contact us anytime.


Choosing the right debt solution is a personal decision and depends on various factors, including your financial situation, goals, and attitudes towards debt. Whether it’s a consumer proposal, bankruptcy, or another debt relief method, choosing an option that will offer you a new beginning and a more straightforward path toward financial freedom is vital. Remember, there’s no one-size-fits-all answer when it comes to managing debt. Each journey is unique, and finding the right path requires careful consideration and, often, professional guidance.

The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal debt relief and insolvency services. They can help you prepare by examining all debt relief options and devise a strategy to resolve your debts. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well-informed and don’t rush into any solutions. All of our consultations are free, without time limits.

Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.

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Mihir Chande
Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee Mike, a Chartered Accountant, began his insolvency career in the Corporate Insolvency and Restructuring group at one of Canada’s largest insolvency firms. After gaining extensive experience, he founded Chande Debt Solutions to offer personalized and empathetic debt relief services to clients seeking an alternative to traditional solutions.

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